Each one of the many ICOs on which we have advised or are advising have their own peculiarities and different treatment. However, there are some underlying fundamentals which remain the same for tokens of the same token class (see our token framework proposal).
We have decided to share these insights with the community. This article therefore is the start of a series of blog posts with practical insights on specific things to be considered when preparing an Initial Token Offering.
1. Tokens used for Payment
For example, if we are looking at an issuance of tokens that are intended to serve as a means of payment between independent third parties (not between the token purchaser and the issuer), the tokens classify as payment instrument and the issuing legal entity is deemed as financial intermediary pursuant to the Swiss Anti-Money Laundering Act. As a result, the issuing legal entity must become a member of a self-regulatory organization or put itself subject to the supervision of the Swiss Financial Market Authority.
The role as financial intermediary and issuer of a payment instrument implies various obligations. This includes among others an internal organisation with an AMLA officer and deputy, the planning, supervising and documenting of the ongoing basic and advanced training of all persons and the preparation, if necessary, of the internal directives for combating money laundering and terrorist financing. Whether and to what extent this can be outsourced heavily depends on the rules and regulations of the self-regulatory organisation the issuer joins.
Although qualifying as a financial intermediary represents an obstacle, start-up companies can overcome it with reasonable effort and contribute to the quality and sustainability of Initial Coin Offerings.
2. Tokens qualifying as Securities under Swiss law
Such tokens will require a prospectus under Swiss law. Compared to foreign jurisdictions the legal requirements for a Swiss prospectus are not onerous. However, it is not advisable to go with the bare legal minimum because prospectus standards have evolved and there is a market expectation as to what a proper prospectus should include (e.g. background information about the business of the company, the deemed use of the proceeds and risks related to the business).
Any token requiring a prospectus under Swiss law will with a very high probability also require a prospectus under EU law. These prospectus requirements are significantly higher than under Swiss law. Hence token issuers will often need to structure their marketing in the EU countries in such way to fall under exemptions. Most notably it may be necessary to limit the access of interested investors to a total of less than 150 per EU member state. This has been successfully done in the past and, although it does go against the grain of an ICO being open to the public, it is the only way to correctly address existing regulation.
3. Defining the counter value of a Token
Before conducting an Initial Token Offering the counter value of a token must be defined. Tokens can either be valued against crypto-currencies such as Ether and Bitcoin or FIAT currencies.
Although it might be obvious to evaluate tokens of a blockchain project against crypto currencies, this is not recommended and can lower the attractiveness of an Initial Token Offering. For example, where one token is equivalent to 0.005 Ether, the volatility of Ether may result in a further advantage for the pre-sale participants (as they may purchase tokens earlier before the Ethereum price is rising) and thus later subscribers might well be deterred from participating in the public offering as the proportionality becomes unattractive. The other way around, the pre-sale participants may claim further tokens if the Ethereum price decreases, as their discount or bonus is diminished. Therefore, we advise to link the token offering to a (stable) FIAT currency.
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If you liked this article, you might also be interested in reading more from the same series:
How Crypto-Tokens qualify under Swiss Law: a comprehensive Framework, by Ronald Kogens and Catrina Luchsinger Gähwiler
Spotlight on Copyright Issues of Blockchain Technology, a guestblog by Demian Stauber, Attorney at Law in the fields of Intellectual Property and ICT law at Rentsch Partner AG.